As a result of scandals, investigations, and even an environmental catastrophe, there has been a wave of securities lawsuit filings in the U.S. against Brazilian-domiciled companies whose securities are listed in the U.S. This filing trend began in late 2014 with the first lawsuit filing against Petrobras and certain of its directors and officers, which was in turn followed by lawsuits against other companies caught up in the corruption scandal. In recent weeks lawsuits related to a separate regulatory investigation in Brazil have emerged, bringing the total number of securities lawsuits pending in the U.S. against Brazilian companies to six. These developments, along with events in Brazil itself, have roiled the D&O insurance marketplace in Brazil, particularly for Brazilian companies with securities listed in the U.S.
The long-running Operação Lava Jato investigation (Operation Car Wash) began as a money-laundering and corruption investigation of the state-controlled oil company Petrobras. It has since spread to involve numerous other companies. The revelations that have followed from this investigation have affected the share prices of a number of the companies involved, which in turn has resulted in the filing of securities class action lawsuits in the U.S. (as well as, in some cases, in Brazil as well, as well as in other countries).
The first of the companies to be hit with a securities class action lawsuit was Petrobras, which was named as defendant in a securities class action lawsuit filed in the Southern District of New York in December 2014 (refer here). The Petrobras was followed within a few months by the filing of securities class action lawsuits against two other companies caught up in the corruption investigation. The first of these two was Braskem, which, as discussed here, was named as a defendant in a securities class action lawsuit filed in the Southern District of New York in July 2015. Eletrobras, which as discussed here (second item) was named in a securities class action lawsuit filed in the Southern District later in July 2015.
These three Petrobras investigation-related securities lawsuits were followed in December 2015 with a separate lawsuit relating to massive dam failure that occurred on November 5, 2015 near Mariana, in the Minas Gerais state, in Brazil. The failed dam is the property of Samarco Mineração, S.A., a joint venture between Vale, S.A. and BHP Billiton. Following the disaster and the ensuing slump in Vale’s share price, investors launched a securities class action lawsuit against Vale in the Southern District of New York (as discussed here). Although BHP Billiton is not a Brazilian company, and therefore it is not directly relevant to the topic of this blog post, it is probably worth noting that BHP Billiton, a global mining company with headquarters in Australia and London, was also named in a securities class action lawsuit, in February 2016 (refer here).
As part of the larger investigation of corruption in Brazil, the Brazilian federal police have been conducting an an ongoing criminal investigation (Operação Zelotes) since 2013 of suspected corruption at Brazil’s Administrative Council of Tax Appeals (CARF), an agency within Brazil’s Finance Ministry. Brazil’s Internal Revenue Service (RFB). Now two of the companies caught up in the Operação Zelotes tax fraud and corruption investigation have been hit with securities class action lawsuits in the U.S.
The first of these two companies to be named in a securities class action lawsuit in the U.S. is Gerdau, S.A., which was named as a defendant in a securities class action lawsuit filed in the Southern District of New York in May 2016. As discussed here, the plaintiffs allege that “Defendants made false and/or misleading statements and/or failed to disclose that: (i) the Company was engaged in a bribery scheme in collusion with Brazil’s Board of Tax Appeals (“CARF”); (ii) Gerdau had defrauded Brazilian tax authorities of roughly $429 million in taxes; (iii) Gerdau’s Chief Executive Officer (“CEO”) and other directors and employees of the Company had engaged in bribery, money laundering, and influence peddling.” A copy of the plaintiff’s complaint can be found here.
The second of the two companies recently named in a U.S. securities lawsuit is Banco Bradesco, which was hit with securities class action lawsuit on June 3, 2016. As discussed here, the plaintiffs allege that “defendants issued false and misleading statements to investors and/or failed to disclose that: (1) Banco Bradesco was engaged in a bribery scheme in collusion with the Brazilian Finance Ministry’s CARF; (2) Banco Bradesco executives were plotting to avoid an $828 million tax fine that was imposed by Brazil’s Internal Revenue Service; (3) Banco Bradesco’s CEO and other executives, directors and employees of the Company had engaged in bribery, money laundering, and corruption; (4) Banco Bradesco’s internal control over financial reporting and its disclosure controls and procedures were not effective.” A copy of the plaintiffs’ complaint can be found here.
These two latest lawsuit filings bring the total of U.S. securities class action lawsuits pending against Brazilian-domiciled companies to six. These lawsuits have all been filed in the last 18 months or so. These lawsuits have emerged in a country that historically has had a relatively benign D&O claims environment (at least compared to the U.S. and even to other countries such as Australia and Canada). The emergence of these claims has had a significantly disruptive impact on the D&O insurance environment in Brazil, particularly for Brazilian companies with U.S.-listings. However, the marketplace disruption is not limited just to the U.S.-exposed Brazilian companies. The breadth of the corruption and tax evasion investigations in the country has touched a very large number of Brazilian companies, and the possibility that other companies could become involved has produced a general feeling of uneasiness and uncertainty, making for a highly troubled D&O insurance marketplace.
There is some irony here, in that in the past one of the biggest complications in the Brazilian D&O insurance marketplace is many companies were not persuaded that they needed the insurance at all, as the companies simply didn’t see the need for it. However, now that everyone can see why the insurance is necessary, a great deal of uncertainty has been introduced into the marketplace, affecting pricing as well as the availability of desired terms and conditions. (I know there is a lot more that might be said about the current state of the Brazilian D&O insurance marketplace, and I encourage others who are active in Brazil to add their comments to this post using the blog’s comment feature.)
The emergence of the lawsuits against the Brazilian domiciled companies has been one of the factor that has been driving the increase in recent years in the numbers of lawsuit filings against non-U.S. companies. As I discussed in my year-end review of securities lawsuit filing (here), the filing of lawsuit against foreign companies was one of the significant factors contributing to the increase in securities class action lawsuit filings in 2015.
The number of securities suit filings against non-U.S. companies continues to be a significant factor in the pace of lawsuit filings in 2016. According to my unofficial year-to-day tally of securities lawsuit filings, there have been 120 securities suit filings so far in 2016 (which, by the way, put the pace of filings this year well ahead even of last years elevated filings levels). Of the 120 suits so far this year, 21 have involved non-U.S. companies, meaning that the lawsuits against non-U.S. companies represent about 17.5% of all securities suit filings, a litigation rate that is well above historical levels (in which lawsuits against foreign companies represented about 11% of all filings, during the period 1996-2014), and about level with last year’s rate (when lawsuit against non-U.S. companies represented about 18% of all securities suit filings).